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EU reforms set to encourage lending to SMEs

The European Commission yesterday unveiled a series of reforms which will see banks and investors encouraged to lend to small businesses.

The new directive from Brussels will create fund products which will make the purchase of a diversified portfolio of SME equity or debt products easier for investors. The commission is also considering the reductions of investor costs on securitised loans which are products that enable banks to offload small business loans, thereby rapidly raising capital to then support further small businesses.

A spokesman for the Association of Financial Markets in Europe commented: “Securitisation could play a larger role if the economics of SME loan securitisation can be restored as it is an efficient way for banks to be able to free up capital and raise cash for further lending to existing or new SME borrowers.”

In the meantime, the European Central Bank (ECB) stated yesterday that compared to a year earlier there was a 2.2 per cent fall in private lending volumes in February.

Notwithstanding political pressure on the banks to increase small business lending, some remain reserved while others are refraining from cross-border lending and some attempting to evade entirely any potentially risky loans in advance of sector stress tests scheduled for later in the year.

Analysts however are optimistic that the restriction on lending is finally bottoming out and anticipate a positive turnaround in the not too distant future.

Economist Christian Schulz from Berenberg Bank said: “A slightly less negative growth rate of loans to the private sector of minus 2.2 per cent could point to a gradual inflection point in the credit cycle. The economic recovery, lower interest rates and returning business confidence should gradually boost credit demand by households and companies, while the ECB’s asset quality review should remove the remaining obstacles to credit supply.”